Chapter 6 Strategy Analysis Choice Strategic Management Concepts
- Slides: 70
Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 11 th Edition Fred David Copyright 2007 Prentice Hall 1
Chapter Outline The Nature of Strategy & Choice A Comprehensive Strategy-Formulation Framework The Input Stage Copyright 2007 Prentice Hall 2
Chapter Outline (cont’d) The Matching Stage The Decision Stage Cultural Aspects of Strategy Choice Copyright 2007 Prentice Hall 3
Chapter Outline (cont’d) The Politics of Strategy Choice Governance Issues Copyright 2007 Prentice Hall 4
Strategy Analysis & Choice To acquire or not to acquire, that is the question – Robert J. Terry Life is full of lousy options – General P. X. Kelley Copyright 2007 Prentice Hall 5
Strategy Analysis & Choice Nature of Strategy Analysis & Choice -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Copyright 2007 Prentice Hall 6
Strategy Analysis & Choice Alternative Strategies Derive From -n n n Vision Mission Objectives External audit Internal audit Past successful strategies Copyright 2007 Prentice Hall 7
Strategy Analysis & Choice Generating Alternatives -Participation in generating alternative strategies should be as broad as possible Copyright 2007 Prentice Hall 8
Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage 2: The Matching Stage Copyright 2007 Prentice Hall Stage 3: The Decision Stage 9
Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix (CPM) Copyright 2007 Prentice Hall 10
Stage 1: The Input Stage §Basic input information for the matching & decision stage matrices §Requires strategists to quantify subjectivity early in the process §Good intuitive judgment always needed Copyright 2007 Prentice Hall 11
Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 12
Stage 2: The Matching Stage §Match between organization’s internal resources & skills and the opportunities & risks created by its external factors Copyright 2007 Prentice Hall 13
Stage 2: The Matching Stage SWOT Matrix §Strengths §Weaknesses §Opportunities §Threats Copyright 2007 Prentice Hall 14
SWOT Matrix Four Types of Strategies §Strengths-Opportunities (SO) §Weaknesses-Opportunities (WO) §Strengths-Threats (ST) §Weaknesses-Threats (WT) Copyright 2007 Prentice Hall 15
SO Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall SO Strategies Use a firm’s internal strengths to take advantage of external opportunities 16
WO Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall WO Strategies Improving internal weaknesses by taking advantage of external opportunities 17
ST Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats 18
WT Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall WT Strategies Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats 19
SWOT Matrix Developing the SWOT §List firm’s key internal Strengths §List firm’s key internal Weaknesses §List firm’s key external Opportunities §List firm’s key external Threats Copyright 2007 Prentice Hall 20
SWOT Matrix Strengths – S Weaknesses – W List Strengths List Weaknesses Opportunities – O SO Strategies WO Strategies List Opportunities Use strengths to take advantage of opportunities Overcoming weaknesses by taking advantage of opportunities Threats – T ST Strategies WT Strategies List Threats Use strengths to avoid threats Minimize weaknesses and avoid threats Leave Blank Copyright 2007 Prentice Hall 21
Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Excess working capacity (strength) 20% annual growth in the cell phone industry (opportunity) Insufficient capacity (weakness) Strong R&D (strength) Poor employee morale (weakness) + Resultant Strategy = Acquire Cellfone, Inc. Exit of two major foreign Pursue horizontal integration + competitors from the = by buying competitor's industry (opportunity) facilities + + Decreasing numbers of young adults (threat) Strong union activity (threat) = = Develop new products for older adults Develop a new employee benefits package 22
Limitations with SWOT Matrix n n n Does not show to achieve a competitive advantage Provides a static assessment in time May lead the firm to overemphasize a single internal or external factor in formulating strategies Copyright 2007 Prentice Hall 23
Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 24
SPACE Matrix Strategic Position & Action Evaluation Matrix §Aggressive §Conservative §Defensive §Competitive Copyright 2007 Prentice Hall 25
SPACE Matrix Two Internal Dimensions §Financial Strength (FS) §Competitive Advantage (CA) Copyright 2007 Prentice Hall 26
SPACE Matrix Two External Dimensions §Environmental Stability (ES) §Industry Strength (IS) Copyright 2007 Prentice Hall 27
SPACE Factors Internal Strategic Position Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow External Strategic Position Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand Ease of exit from market Risk involved in business 28
SPACE Factors Internal Strategic Position External Strategic Position Competitive Advantage CA Industry Strength (IS) Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Technological know-how Control over suppliers & distributors Growth potential Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization 29
Steps to Developing a SPACE Matrix Select a set of variables to define FS, CA, ES, & IS Assign a numerical value: 1. 2. 1. 2. 3. From +1 to +6 to each FS & IS dimension From -1 to -6 to each ES & CA dimension Compute an average score for each FS, CA, ES, & IS Copyright 2007 Prentice Hall 30
Steps to Developing a SPACE Matrix 1. 2. 3. Plot the average score on the appropriate axis Add the two scores on the x-axis and plot the point. Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point Draw a directional vector from the origin through the new intersection point. Copyright 2007 Prentice Hall 31
SPACE Matrix FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 -1 +2 +3 +4 +5 +6 -2 -3 -4 Defensive -5 -6 Competitive ES 32
Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 33
BCG Matrix Boston Consulting Group Matrix §Enhances multi-divisional firm in formulating strategies §Autonomous divisions = business portfolio §Divisions may compete in different industries §Focus on market-share position & industry growth rate Copyright 2007 Prentice Hall 34
BCG Matrix Relative Market Share Position §Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry Copyright 2007 Prentice Hall 35
BCG Matrix Relative Market Share Position Industry Sales Growth Rate High 1. 0 High +20 Medium. 50 Low 0. 0 Stars II Question Marks I Cash Cows III Dogs IV Medium 0 Low -20 36
BCG Matrix Question Marks §Low relative market share – compete in highgrowth industry §Cash needs are high §Case generation is low §Decision to strengthen (intensive strategies) or divest Copyright 2007 Prentice Hall 37
BCG Matrix Stars §High relative market share and high growth rate §Best long-run opportunities for growth & profitability §Substantial investment to maintain or strengthen dominant position §Integration strategies, intensive strategies, joint ventures Copyright 2007 Prentice Hall 38
BCG Matrix Cash Cows §High relative market share, competes in lowgrowth industry §Generate cash in excess of their needs §Milked for other purposes §Maintain strong position as long as possible §Product development, concentric diversification §If weakens—retrenchment or divestiture Copyright 2007 Prentice Hall 39
BCG Matrix Dogs §Low relative market share & compete in slow or no market growth §Weak internal & external position §Liquidation, divestiture, retrenchment Copyright 2007 Prentice Hall 40
Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 41
The Internal-External Matrix n n Positions an organization’s various divisions in a nine-cell display Similar to BCG Matrix except the IE Matrix: q q Requires more information about the divisions Strategic implications of each matrix are different Copyright 2007 Prentice Hall 42
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IE Matrix n Based on two key dimensions q q n The IFE total weighted scores on the x-axis The EFE total weighted scores on the y-axis Divided into three major regions q q q Grow and build – Cells I, II, or IV Hold and maintain – Cells III, V, or VII Harvest or divest – Cells VI, VIII, or IX Copyright 2007 Prentice Hall 44
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Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 46
Grand Strategy Matrix §Tool formulating alternative strategies §Based on two dimensions §Competitive position §Market growth Copyright 2007 Prentice Hall 47
RAPID MARKET GROWTH 1. 2. 3. 4. 5. 6. WEAK COMPETITIVE POSITION 1. 2. 3. 4. 5. Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation 1. 2. 3. 4. 5. 6. 7. Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant III Quadrant IV Retrenchment 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Liquidation SLOW MARKET GROWTH STRONG COMPETITIVE POSITION 48
Grand Strategy Matrix Quadrant I §Excellent strategic position §Concentration on current markets/products §Take risks aggressively when necessary Copyright 2007 Prentice Hall 49
Grand Strategy Matrix Quadrant II §Evaluate present approach §How to improve competitiveness §Rapid market growth requires intensive strategy Copyright 2007 Prentice Hall 50
Grand Strategy Matrix Quadrant III §Compete in slow-growth industries §Weak competitive position §Drastic changes quickly §Cost & asset reduction (retrenchment) Copyright 2007 Prentice Hall 51
Grand Strategy Matrix Quadrant IV §Strong competitive position §Slow-growth industry §Diversification to more promising growth areas Copyright 2007 Prentice Hall 52
Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Copyright 2007 Prentice Hall Quantitative Strategic Planning Matrix (QSPM) 53
QSPM Quantitative Strategic Planning Matrix §Technique designed to determine the relative attractiveness of feasible alternative actions Copyright 2007 Prentice Hall 54
Strategic Alternatives QSPM Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Weight Strategy 1 Strategy 2 Strategy 3 Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems 55
Steps to Develop a QSPM 1. 2. 3. Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column Assign weights to each key external and internal factor Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing Copyright 2007 Prentice Hall 56
Steps to Develop a QSPM 4. 5. 6. Determine the Attractiveness Scores Compare the Total Attractiveness Scores Compute the Sum Total Attractiveness Score Copyright 2007 Prentice Hall 57
QSPM Limitations §Requires intuitive judgments & educated assumptions §Only as good as the prerequisite inputs Copyright 2007 Prentice Hall 58
QSPM Advantages §Sets of strategies considered simultaneously or sequentially §Integration of pertinent external & internal factors in the decision making process Copyright 2007 Prentice Hall 59
Cultural Aspects of Strategy Choice Organization Culture §Successful strategies depend on the degree of consistency with the firm’s culture Copyright 2007 Prentice Hall 60
Politics of Strategy Choice Politics in Organizations §Management hierarchy §Career aspirations §Allocation of scarce resources Copyright 2007 Prentice Hall 61
Politics of Strategy Choice Political Tactics for Strategists §Equifinality §Satisfying §Generalization §Higher-order issues §Political access on important issues Copyright 2007 Prentice Hall 62
Governance Issues Board of Directors Roles & Responsibilities §Control & oversight over management §Adherence to legal prescriptions §Consideration of stakeholder interests §Advancement of stockholder rights Copyright 2007 Prentice Hall 63
Corporate Governance Issues Business Week’s “Principles of Good Governance” 1. No more than 2 directors are current or former company executives 2. No directors do business with the company 3. Audit, compensation, and nominating committees made up of outside directors 4. Each director owns a large equity stake in the company 5. At least one outside director with extensive experience 6. Fully employed directors sit on no more than 4 boards – Retirees on no more than 7 7. Each director attends at lest 75% of all meetings Copyright 2007 Prentice Hall 64
Corporate Governance Issues Business Week’s “principles of good governance” 8. Board meets regularly without management present 9. Audit committee meets at least four times a year 10. Board is frugal on executive pay, diligent in CEO succession, and prompt to act when trouble arises 11. CEO is not also the Chairperson of the Board 12. Shareholders have considerable power and information to choose & replace directors 13. Stock options are considered a corporate expense 14. No interlocking directorships Copyright 2007 Prentice Hall 65
For Review (Chapter 6) Key Terms & Concepts Aggressive Quadrant Business Portfolio Attractiveness Scores (AS) Cash Cows Boards of Directors Competitive Advantage (CA) Boston Consulting Group (BCG) Matrix Competitive Quadrant Copyright 2007 Prentice Hall 66
For Review (Chapter 6) Key Terms & Concepts Conservative Quadrant Dogs Culture Environmental Stability (ES) Defensive Quadrant Financial Strength (FS) Directional Vector Governance Copyright 2007 Prentice Hall 67
For Review (Chapter 6) Key Terms & Concepts Grand Strategy Matrix Internal-External (IE) Matrix Halo Error Matching Industry Strength (IS) Matching Stage Input Stage Quantitative Strategic Planning Matrix (QSPM) Copyright 2007 Prentice Hall 68
For Review (Chapter 6) Key Terms & Concepts Question Marks Stars Relative Market Share Position Strategic Position & Action Evaluation (SPACE) SO Strategies Sum Total Attractiveness Score (STAS) ST Strategies Sustainability Copyright 2007 Prentice Hall 69
For Review (Chapter 6) Key Terms & Concepts Strengths, Weaknesses Opportunities, Threats SWOT WO Strategies Total Attractiveness Scores (TAS) WT Strategies Copyright 2007 Prentice Hall 70
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